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July 19, 2012

Regulators Question Interest Rates From Sweden to Singapore

LIBOR could be scrapped; 34 traders under investigation in rate-rigging scandal

A Japanese stock board. (Photo: AP)

Regulators are questioning how interest rates are set across the globe—not just LIBOR and EURIBOR, but also various in-country rates such as TIBOR (Tokyo), STIBOR (Stockholm), SIBOR (Singapore) and HIBOR (Hong Kong).

The revelation that the London Interbank Offered Rate (LIBOR) was rigged, and has been for some time, has led to questions in other countries about their own benchmarks. As investigations proceed, September talks are planned on whether to scrap LIBOR altogether for a standard that is less prone to manipulation.

The European Central Bank (ECB) is taking action as well, to try to restore faith in EURIBOR, the euro benchmark, according to unnamed sources in a Reuters report. A total of 43 banks are involved in setting EURIBOR.

Interbank rates in individual countries can be easier to manipulate, since fewer banks are involved in setting the benchmark. “Collusion typically occurs in markets with just a few players,” said Rosa Abrantes-Metz in the report. Abrantes-Metz, an economist with the consulting firm Global Economics Group and an associate professor at New York University’s Stern School of Business, added, “All else being equal, the smaller the group, the easier it is to collude.”

STIBOR is set by only five banks after the Royal Bank of Scotland (RBS) removed itself from the panel on April 30. According to the biannual Financial Stability Report by the Swedish central bank, Riksbank, published June 1, “Many market participants state in the Riksbank’s latest risk survey that there are problems with the STIBOR.”

The report added, ”This refers to incentives for the banks to set the STIBOR at fair levels, the opinion that too few banks determine the STIBOR and the insufficient transparency of the STIBOR and its framework.”

Norway’s NIBOR is set by six banks; Denmark’s CIBOR (Copenhagen) is set by eight. The Japanese Bankers Association sets TIBOR from 16 banks for yen and 15 for euroyen. In South Korea, which is already probing how its three-month CD rate is set, 10 brokerages send quotes twice a day to the Korea Financial Investment Association. HIBOR is set based on 20 submissions daily.

At least 34 traders are also under investigation in the main LIBOR scandal. Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank, according to an unidentified source, are being investigated for their ties to ex-Barclays trader Philippe Moryoussef. Societe Generale is also under scrutiny.

Bittar left Deutsche Bank last year and is now at Bluecrest Capital Management, Europe’s third-biggest hedge fund with $30 billion under management. Other banks involved in the probes include Lloyds Banking Group, Mitsubishi UFJ Financial Group, Royal Bank of Scotland Group, UBS, Citigroup, Barclays and JPMorgan Chase & Co.

“Many of the ingredients which made it pretty easy to manipulate LIBOR and collude are common in other benchmarks,” Abrantes-Metz was quoted saying. She added, “Regulatory agencies are starting to take a look at those and there is a growing sense they need to change.”

Reuters reported that a meeting scheduled for September of central bankers and regulators will discuss whether LIBOR has been damaged beyond repair and perhaps needs to be replaced with another benchmark.

In a letter to other central bankers, Bank of England (BoE) Governor Mervyn King said that it was "very clear that radical reforms of the LIBOR system are needed." King himself has come under criticism, as has Deputy Governor Paul Tucker, for a lack of action when earlier allegations of rate fixing surfaced.

Tucker has also testified to Parliament about a phone conversation he had with former Barclays CEO Bob Diamond about Barclays’ borrowing rates, which was interpreted by then-Chief Operating Officer Jerry del Missier as approval by the BoE to change its rate submissions. Tucker’s and Diamond’s interpretation of the call differed substantially.

According to a central bank source, King put the LIBOR issue on the agenda for the Sept. 9 meeting in Basel, Switzerland, of the Economic Consultative Committee of global central bankers. The following week, discussions will continue at the Financial Stability Board’s steering committee meeting. That meeting also includes financial regulators and is chaired by global financial regulator Mark Carney, who is also governor of the Bank of Canada.

On Wednesday, Fed Chairman Ben Bernanke and Carney posed the possibility that another standard will need to be devised as a means of restoring faith.

In the report, Carney said, "There are different alternatives if LIBOR cannot be fixed. If it's structurally flawed and can't be fixed—which is a possibility—there may need to be different types of approaches, and we need to think that through."

He added, "There is an attraction to moving to obviously more market-based rates if possible." It is crucial, he said, that markets have “absolute confidence” in the rate used for $550 trillion of interest rate derivatives contracts and that influences the cost of a range of financial products from credit cards to mortgages.

Bernanke mentioned Treasury bill rates as a possibility for a new benchmark, although he said the Fed did not as yet support a specific replacement. He also mentioned repo rates and Overnight Index Swap rates, which Carney also floated as possibilities.